Tax evasion as a criminal offence: A blessing for taxpayers and burden on tax officials

The Commissioner General of Inland Revenue and the Commissioners of the Tax Appeals Commission, have to be fully mindful of the protections and safeguards that the law extends to taxpayers through the criminalisation of tax evasion 

At first glance, the heading may appear surprising and paradoxical. However, a closer examination of the nature, procedures, and consequences of criminal and civil proceedings reveals a different reality. Contrary to common view, criminal proceedings in tax matters often provide greater protections and procedural safeguards to taxpayers than to tax officials. 

The recently enacted Inland Revenue (Amendment) Act, No. 11 of 2026 has drawn significant public attention and concern, particularly in relation to Criminal Proceedings under Chapter XVIII. This provision, which expands the scope of criminal liability for certain tax compliance failures (such as failure to file tax returns, register for TIN, appear before the tax official, and submit required docs) has triggered widespread unease among taxpayers and the general public as well. 

Criminalisation of tax evasion: Blessing or curse?

It is important, however, to view this development within the broader picture of the Inland Revenue Act, No. 24 of 2017, as amended (the “IR Act”). The IR Act has expressly recognised tax evasion as a criminal offence under Section 189. At first glance, this shift may appear to impose an additional burden on taxpayers, or even be seen as a regulatory “nightmare.”

When properly understood, the criminalisation of tax evasion does not merely function as a punitive mechanism, but also as a framework that strengthens legal certainty, enhances administrative discipline, and reinforces taxpayer protections against arbitrary enforcement and unlawful actions of tax officials. In this sense, rather than creating a threat, the criminalisation of tax evasion may be regarded as a safeguard—and even a blessing—for taxpayers.

 Recognising the importance of evidence-based tax administration, the CGIR, as part of the reforms undertaken under the IMF Extended Fund Facility program, issued a commendable and transparent instruction on 22 June 2023 under Reference No. CGIR/2023/3-1 (Ins & Cir) 15

Due diligence in tax adjudication: The role of the CGIR and TAC 

Tax administrators, including tax officials, and tax adjudicators, particularly the Commissioner General of Inland Revenue (the CGIR) and the Commissioners of the Tax Appeals Commission (TAC), have to be fully mindful of the protections and safeguards that the law extends to taxpayers through the criminalisation of tax evasion. These safeguards assume paramount significance in cases involving the rejection of tax returns and the issuance of amended or additional assessments. 

Since such assessments may serve as the foundation for subsequent criminal proceedings, the CGIR and TAC ought to ensure strict compliance with the law, adherence to principles of natural justice, and reliance on credible evidence in determination of the appeal lodged against the amended assessment.

 It is reported that more than 80% of amended assessments issued by the IRD eventually end up in the appeals process

Rejection of the tax return: Gateway to criminal proceedings

This process begins with the rejection or amendment of a tax return under Section 135(1) of the IR Act. The provision imposes a mandatory obligation on a tax official before issuing an amended or additional assessment on a taxpayer. In particular, the tax official must possess evidence that enables him to exercise his best judgment in determining whether the taxpayer has paid the correct amount of tax. Accordingly, the existence of such evidence is a statutory precondition for the issuance of an amended or additional assessment. The section provides:

 “Subject to this section, the Assistant Commissioner may amend a tax assessment (referred to in this section as the ‘original assessment’) by making such alterations or additions, based on such evidence as may be available and to the best of his judgement, to the original assessment of a taxpayer for a tax period to ensure that:

 (b) in any other case, the taxpayer is liable for the correct amount of tax payable (including a nil amount) in respect of the tax period to which the original assessment relates.”

 A careful examination of this provision reveals several important safeguards afforded to taxpayers. 

1. Credible evidence:

 A tax return cannot be rejected merely on the basis of assumption, suspicion, or generalised allegations. The law expressly requires the tax official to act on “such evidence as may be available.” Consequently, the rejection of a return must be supported by objective facts and credible evidence indicating that the return does not correctly reflect the taxpayer's tax liability.

2. Best judgement: The officer must exercise his “best judgment” (not good or better) in determining the correct amount of tax payable. The phrase “best judgment” does not authorise arbitrary estimations or illogical assessments. Rather, it requires the officer to make a fair, reasonable, and evidence-based determination after considering all relevant facts and circumstances available at the time. Courts in many jurisdictions have consistently held that a best-judgment assessment must be honest, rational, and grounded in evidence, not speculation.

3. Ensuring correct amount of tax: The primary purpose of an amended assessment is not to punish the taxpayer but to determine the correct tax liability. In essence, it is a process of finding and correcting mistakes. Until the tax authority lawfully establishes that the taxpayer has paid less tax than what is legally due, there is no sound basis to accuse the taxpayer of tax evasion.

Accordingly, the rejection of a tax return serves as the legal gateway to any subsequent criminal proceedings for tax evasion. It is only after the tax authority has gathered evidence, exercised its best judgment, and quantified the alleged tax shortfall that a valid amended or additional assessment may be issued.

Recognising the importance of evidence-based tax administration, the CGIR, as part of the reforms undertaken under the IMF Extended Fund Facility (EFF) program, issued a commendable and transparent instruction on 22 June 2023 under Reference No. CGIR/2023/3-1 (Ins & Cir) 15. Copies of this instruction were also forwarded to the Hon. Attorney General's Department, the Auditor General, and other relevant stakeholders. (The copy is yet to be uploaded to the IRD website)

In the absence of referring to such statutory authority, the assessment becomes unlawful, arbitrary, and untenable in law

The very first instruction underscores the fundamental principle that tax assessments must be based on credible evidence rather than arbitrary suspicion:

“The Detailed Audit / Field (Audit) is not a rule but an exception. No audit should be initiated without any prima facie and material facts such as 3rd party information, reports given by the Risk Management Unit, etc.”

Many tax assessments issued are invalid in law

It is a matter of serious concern that many tax assessments issued by the IRD appear to disregard the safeguards and protections expressly guaranteed by the law for the benefit of taxpayers. Such assessments are therefore arbitrary, unreasonable, and invalid in law.

The consequences are evident. It is reported that more than 80% of amended assessments issued by the IRD eventually end up in the appeals process. This unusually high level of appeal cases suggest systemic deficiencies in the assessment process and imposes substantial financial, administrative, and emotional costs on taxpayers, making honest and dodging taxpayers alike run away from social responsibility of payment of taxes.

It is observed that a significant number of amended assessments are issued without satisfying the fundamental requirement of credible evidence, which must comprise both legal and factual basis. 

It is regrettable that many tax officials present conclusions for rejecting tax returns as though they were evidence. Statements such as “the declared sales or profits were insufficient” or “the interest expense was not incurred in the production of income” merely state the outcome; they do not explain the factual basis for that conclusion

Some of the fundamental defects that may render an assessment invalid are as follows:

1. Non-reference to the relevant section of the law

Article 148 of the Constitution vests the power of taxation exclusively in Parliament and embodies the fundamental principle that no tax shall be imposed except under the authority of a law. Consequently, any tax liability imposed by a tax official in addition to, or in contradiction of, the tax declared by a taxpayer must be supported by a specific statutory provision authorising such imposition. In the absence of referring to such statutory authority, the assessment becomes unlawful, arbitrary, and untenable in law.

It is widely observed that many amended assessments issued by the IRD fail to identify the specific statutory provision under which the assessment has been made. Such omissions strike at the very foundation of the assessment and weaken the taxpayer's right to challenge it effectively as the grounds of appeal to the CGIR could not be formulated. The judgment given by the Court of Appeal in M.A.S. Faique v. CIR (CA No. 541/93) has established this fact by directing the CGIR to nullify the amended assessment, because the tax official had failed to refer to the correct Section of the law.

2. Conclusions presented as evidence

It is a mandatory requirement that the basis and evidence for amending a tax return furnished by a taxpayer should be communicated by a tax official in terms of Sections 135(1) and (5) of the IR Act.

It is regrettable that many tax officials present conclusions for rejecting tax returns as though they were evidence. Statements such as “the declared sales or profits were insufficient” or “the interest expense was not incurred in the production of income” merely state the outcome; they do not explain the factual basis for that conclusion. What is required is a clear explanation of why the sales or profits were considered insufficient, or why the interest expense was regarded as unrelated to the production of income.

Any doubt or ambiguity in a taxing provision must be resolved in favour of the taxpayer. Had this principle been consistently observed by the IRD, the number of tax appeals currently pending would likely have been reduced by more than half

Evidence consists of objective and verifiable facts and data used to support or negate a claim. A conclusion, by contrast, is the subjective determination or opinion drawn from evaluating that fact. While evidence is factual and independent, a conclusion reflects the decision-maker’s interpretation of the facts.

The distinction between a reason and a conclusion was confirmed in New Portman Ltd v. W. Jayawardane and Others (CA No. 2366/80), where the Court of Appeal held that an assessment stating “the accounts did not reveal the correct profits” was invalid because it conveyed a conclusion rather than a reason. Likewise, in Mrs. Fernando and Another v. A.M. Ismail (SC Appeal No. 22 of 1981), the Supreme Court held that communicating reason –even if it were obvious- is an inalienable right of the taxpayer, and failure to do so renders the assessment invalid.

3. Taxing by ambiguity

Another important safeguard, indeed a fundamental right afforded to taxpayers, is that no tax should be imposed except through clear, explicit, and unambiguous statutory language. Any doubt or ambiguity in a taxing provision must be resolved in favour of the taxpayer. Had this principle been consistently observed by the IRD, the number of tax appeals currently pending would likely have been reduced by more than half.

As affirmed by the Supreme Court in Vallibel Lanka Ltd., vs. Director General of Customs, tax liabilities cannot be imposed by implication, inference, or ambiguity. The intention to levy a tax must be expressed in clear and unambiguous statutory language. Where doubt exists, taxing provisions must be interpreted strictly against the State and in favor of the taxpayer.

4.Violating time-bar provisions

The legislature has imposed strict time limits for tax assessments (30 months for income tax and 36 months for VAT) and appeal determinations (24 months) to ensure administrative efficiency and taxpayer certainty. Failure to comply, renders the relevant action null and void, with the matter deemed resolved in the taxpayer’s favor. 

Nevertheless, many assessments are issued outside these statutory limits under the pretext of the wilful evasion exception rule, contrary to the clarification of “wilful evasion” issued by the CGIR in Instruction No. CGIR/2023/3-1 (Ins & Cir) 15 dated 22.06.2023, “Establishing of an additional tax liability based on the facts and information provided by a taxpayer on his return itself is not a willful evasion.”

Establishing of an additional tax liability based on the facts and information provided by a taxpayer on his return itself is not a wilful evasion

Conclusion

The true significance of criminalising tax evasion lies not in the threat of punishment, but in the safeguards it creates for taxpayers and the discipline it imposes on tax administration. Because an amended assessment may become the foundation for criminal proceedings, Parliament has deliberately required tax officials to act on credible evidence, exercise their best judgment, communicate intelligible reasons, and strictly comply with the law and principles of natural justice.

A fair and effective tax system is built not on the fear of prosecution, but on the rule of law. Viewed from this broader perspective, treating tax evasion as a criminal offence is not a nightmare but a significant blessing for law-abiding taxpayers and society as a whole.

The true significance of criminalising tax evasion lies not in the threat of punishment, but in the safeguards it creates for taxpayers and the discipline it imposes on tax administration

A fair and effective tax system is built not on the fear of prosecution, but on the rule of law. Viewed from this broader perspective, treating tax evasion as a criminal offence is not a nightmare but a significant blessing for law-abiding taxpayers and society as a whole 

(The author is a retired Deputy Commissioner General of the Inland Revenue Department. He could be reached via email [email protected])